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This past week interest rates moved sharply higher in response to a host of unfriendly bond news. Let's discuss what happened and what to watch for in the weeks ahead.

We Need More Revenue

This past week was shortened due to the Memorial Day holiday, but it was filled with tall problems which caused rates to spike. It all started on the Friday before Memorial Day when Treasury Secretary Janet Yellen told the world that the path for rates is higher, and we need more revenue.

This was an important statement as it highlights our deficit spending and our need to sell more treasury debt to fund our government.

The debt sales were tested this past week and ended up being a main driver for the spike higher in interest rates. The Treasury sold $183B worth of 2,5 and 7-yr Notes and the auction results were poor where buyers demanded higher interest rates to purchase all the debt. As Treasury yields move higher, mortgage-backed security prices drop, thereby elevating home loan rates.

Higher For Longer

Since the Fed Meeting back on May 1st, where the Fed Chair Powell said they are not hiking or cutting rates, many officials have since been pouring cold water on the idea that a rate cut is coming soon.

This past week, we heard comments like "Don't count out a rate hike" as the next move and "higher indefinitely" was uttered by another Fed official. This means those betting on a rate cut soon might want to reassess their position as the chance for the first cut has now been pushed back to November. And as we have seen over the last year or so, if inflation remains stubbornly high, we may not see a cut at all in 2024.

Higher Oil

Yet another problem for interest rates and the overall economy is energy prices. Oil hit $80 a barrel last week. This is significant as oil and 30-year mortgage rates tend to ebb and flow together. When oil prices edge higher so do mortgage rates. Why?

High oil prices are inflationary. If inflation readings remain near current levels or even edge higher, there is no way the Fed can cut interest rates which means higher for longer.

Consumer Sentiment Moves Higher

Bonds hate inflation, bonds hate more bonds and bonds hate good news. Despite the uncertainty about higher interest rates and elevated oil prices, the consumer sentiment reading last week was an upside surprise as people felt a bit more optimistic - breaking a trend of recent pessimism.

Bottom line: We should take the Fed at its word that rates will be higher for longer. Deficit spending and high energy prices will help fuel this notion. 

This past week interest rates inched up as "higher for longer" signs around the globe emerged. Before we get into the news, let's take a moment to reflect on this Memorial Day holiday and its significance.

Originally called Decoration Day, Memorial Day was first observed after the Civil War and is in remembrance of those men and women who have died in military service for our country. Memorial Day was declared a Federal Holiday in 1971 and commemorated on the last Monday in May. Memorial Day weekend is often the unofficial kick-off of summer.

The Fed is Higher for Longer

On Wednesday, the Minutes from the previous Fed Meeting three weeks ago highlighted that most Fed officials do not see the need to cut rates anytime soon.

You may recall at that Fed Meeting, Fed Chair Powell was clear they were not going to hike rates and they were not going to cut either. After sharing the Minutes with the world, we now know the Fed is waiting for inflation to move "sustainably towards 2%" before cutting rates unless the labor market shows weakness.

As of this moment, the chance of a Fed hike has been pushed to November.

The UK is Higher for Longer

Earlier last week, the United Kingdom reported inflation higher than expectations, and this immediately pushed the chance of a rate cut in the region from June until further into the year. As a result, interest rates around the globe spiked higher, including here in the U.S.

Nvidia is Also Higher for Longer

On Wednesday after the bell, chip maker Nvidia reported blockbuster earnings, well beyond expectations. Also helping stocks move higher for longer was Nvidia‘s sales outlook for the future, which highlights that AI or artificial intelligence is moving very fast, and Nvidia is at its forefront.

Dimon Says Brace for "Hard Landing"

JP Morgan Chase CEO, Jamie Dimon was speaking in Shanghai where he said there is a chance the U.S. could endure a "Hard Economic Landing" which could also include stagflationary conditions – slower growth and higher prices.

Bottom line: Higher for longer it is, until it isn't. What will change the Fed's position is a change in the labor market or signs inflation is moderating.

This past week interest rates have reached the lowest levels in over a month. Let's discuss what happened and what news to watch next week.

Ahhhh

Last Wednesday, the highly anticipated Consumer Price Index was released. Back on April 10th, the previous CPI reading was reported hotter than expected and pushed interest rates to the highest levels of the year. As a result, the market was on edge heading into this report.

The good news? The report met expectations, as the headline inflation figure came in at 3.4% year-over-year. With the markets fearful of an even hotter number, the in-line reading gave the financial markets a sigh of relief. Why? If inflation were to re-accelerate, it would further push out a Fed rate cut.

We are not out of the woods yet as it relates to inflation, but this report did offer comfort that the next move from the Fed will indeed be a rate cut at some point. After this reading the chances of a Fed rate cut in September grew larger.

Consumer Slowing Down

Consumer spending makes up nearly two-thirds of our economy. This is important to know when following reports on the health of the consumer as it relates to inflation, Federal Reserve policy, and interest rates.

Retail sales for April were reported and the reading was poor. Essentially, the consumer spent money on gas and groceries and little else. Moreover, when adjusting retail sales for inflation, the readings were negative, meaning the consumer is not buying more goods, but simply paying more.

Weak economic readings like this are bond-friendly and a big reason why rates improved last week.

Seeing real Retail Sales, or inflation adjusted Retail Sales turn lower has been a precursor to a recession in the past, so this is a report worth following moving forward.

Global Yields Lower

Also helping our interest rates are Central Banks around the globe telling the world that they will be cutting rates. It now appears the European Central Bank and Swiss National Bank are going to cut rates before the United States. This news prompted a decline in rates around the world and when that happens it puts pressure to push rates lower here in the U.S.

Bottom line: The case for a Fed rate cut sooner has grown, however further rate improvement may only come upon more reports showing inflation is indeed moving lower.

This past week, interest rates held steady or moved sideways after the nice decline we experienced a couple of weeks ago. Let's discuss what happened and look at the news items in the week ahead.

Fed Speakers Toeing the Line

"Eventually we'll have rate cuts, but for now monetary policy is in a very good place," New York President, John Wiliams.

A couple of weeks ago Fed Chair Jerome Powell told the world that there will not be a rate hike nor will there be a cut. This past week, several Fed officials (including Williams quote above) reiterated the notion that a Fed rate cut is not imminent and that they will keep rates higher for longer if needed.

The Fed Funds Futures, which prices in the probability of Fed rate hikes and cuts, is now pricing in a rate cut for September. Just two weeks ago, the chance of an initial rate cut was in November. This highlights how fast markets can change.

Debt Remains a Headwind

Last week, our Treasury Department needed to sell bonds to fund our government. The longer-dated bond auctions like the 10-year Note carry added significance because long-term bonds are subject to inflation risk and opportunity cost.

On Wednesday, the Treasury Department sold a record number of 10-year Notes and the buying appetite was not that great. This means there were not a lot of bids to purchase the bonds at current rates, so rates did not improve. However, it could be viewed as a victory. Remember...the previous 10-yr auction on April 10th was very bad and pushed the 10-year Note yield sharply higher and mortgage-backed securities prices sharply lower.

As the U.S. continues to run federal deficits, it needs to sell bonds to run the government. These bonds must be purchased by the investment community and if the appetite going forward remains tepid, it will put a limit to rate improvement.

Initial Claims Rise

In another sign that the labor market is cooling off, Initial Claims for the past week rose well above expectations. This forward-looking index on labor market health shows more people filing for first-time unemployment benefits. If this trend continues and elevates the unemployment rate, it will strengthen the case for a Fed rate cut sooner.

4.50

The 10-year Note, which ebbs and flows with 30-year mortgage rates, has declined from the highs of the year and is residing near 4.50%. For rates to improve further, we want to see the 10-yr move beneath 4.50% and then 4.35%. Look at the chart section below to see similar technical headwinds for mortgage-backed securities and mortgage rates.

Bottom line: We must remember the Fed is not hiking rates and they are not cutting rates, so further improvement will be in response to the data. Next week, things heat up.

The Federal Reserve met this past week and held rates steady for the 6th consecutive meeting. Let's discuss what was said and how the market reacted going into next week.

"I think it's unlikely that the next policy rate move will be a hike."

Fed Chair Jerome Powell.

The Fed Meeting

Last Wednesday, the highly anticipated Fed Meeting took place and with inflation potentially reaccelerating, there were fears the Fed might have to hike rates again.

The good news, as evidenced by the quote above, Mr. Powell led the financial markets to believe that there will be no more rate hikes and the next move will indeed be a rate cut.

This was soothing to the markets that were worried that Powell would signal a potential rate hike.

"In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective." FOMC Statement May 1, 2024.

While the Fed said a rate hike is not likely, he also shared that a rate cut is not likely to happen in the near-term either. Until the Fed sees inflation move sustainably towards 2.00%, we should not expect a rate cut in the near-term. The bond market was OK with this, and rates improved. Why would rates improve if the Fed signaled no cut just yet?

The markets see the Fed is serious about bringing inflation back down to its goal of 2.00%. This is good for protecting the value of long-term bonds, like mortgages as inflation erodes its value. If inflation continues to moderate, it will help long-term rates moderate as well.

"Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion." FOMC Statement May 1, 2024.

This announcement was also embraced by the markets as the slower pace of supply of bonds coming into the market can help put downward pressure on interest rates.

Treasury to Sell Less Debt in Q2

Possibly having a bigger impact on rates than the Fed, was the Treasury's announcement that they will not need to sell many more bonds in the 2nd quarter to help fund the government.

This was good news for bonds and rates. Why? Bonds hate more bonds. When the Treasury must sell more and more bonds to fund the government it puts downward pressure on prices and upward pressure on yields. So, this was good news for bonds.

4.70%

As the week was drawing to a close, the 10-yr Note remained beneath 4.70%, which has been a ceiling preventing yields from moving higher. Seeing the 10-yr remain beneath this ceiling after the Fed Meeting was a good sign and could start signaling a peak in rates for 2024.

Bottom line: Interest rates are trying to find a peak and getting past the Fed and this Treasury announcement was a nice hurdle as we move deeper into Spring. While we don't expect much more of an uptick in rates, we should also not expect much improvement either.

This past week interest rates held steady as the markets brace for the Fed meeting this coming Wednesday. Let's discuss what happened and look at the big news events ahead.

The Quiet Period

A lot of the big market moves and volatility in the financial markets have been sparked by Federal Reserve members speaking about monetary policy. The good news this week? It was the blackout or quiet period for the Federal Reserve, where Fed members have no speeches or make no comments on monetary policy for 10 days leading into The Fed meeting.

Bottom line...Fed members did not speak, and markets didn't have to react, and that was good news.

Global Rate Cuts Coming

Economies around the globe are seeing slower economic growth and lower inflation. For this reason, other countries have either cut rates or will begin cutting rates as soon as June. This is going "against the grain" with what the U.S. is doing as we do not expect to be cutting rates until later this year because our inflation remains a bit higher and more persistent.

New Home Sales Jump

In March, New home sales jumped to the highest levels in six months. This leading indicator highlights the pent-up demand for housing as new home sales are counted at the signing of a contract.

Since this report, mortgage rates hit the highest levels of 2024, so it remains to be seen if the strong buying demand will continue.

Demand for U.S. Short-Term Debt

Last Tuesday, the Treasury Department sold a record $69 billion worth of two-year notes. The good news? The buying demand was solid and the yield on the 2-year Note remained beneath 5%.

This is important to follow because if the 2-year Note can remain beneath 5%, it could limit how high long-term rates, like mortgages, rise.

The Buck is Strong

In response to our relatively strong economy and the Federal Reserve not cutting rates in the near term, the U.S. dollar is very strong relative to other countries. One benefit is some downward pressure on oil prices which are priced in dollars. If oil prices go down, that brings less inflationary fears, and this is good for bonds and interest rates.

A strong U.S. dollar also makes imports less expensive, which is good for inflation.

4.60%

The 10-year Note has traded in a range between 4.60% and 4.70%. For long-term interest rates, like mortgages to improve, we need to see the 10-year Note move beneath 4.60%. A move above 4.70% would be bad and likely bring another spike higher in interest rates.

Bottom line: Interest rates are trying to find a peak and next week's Fed Meeting and Treasury Refunding announcement may determine if the peak is here.

This past week interest rates ticked up to the highest level since November on continued inflation fears. Let's discuss what happened and look at the important news in the week ahead.

Lack of Confidence

Federal Reserve Chairman Jerome Powell shared this on Tuesday:

"We've said at the FOMC that we'll need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy. The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence. Right now, given the strength of the labor market and progress on inflation so far, it's appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us. If higher inflation does persist, we can maintain the current level of interest rates for as long as needed."

Essentially, Powell is saying recent inflation numbers are elevated, it's not clear that inflation is moving towards their goal, and they are going to keep rates higher for longer.

The bond market reacted poorly to this quote, with the 10-year Note spiking to 4.70%...the highest level of 2024.

The financial markets may also be losing "confidence" that the Federal Reserve can get inflation back down towards 2%, without the U.S. economy slipping into a recession because of "higher for longer" rates.

"Sell in May and go Away" Coming early?

Stocks did not like the spike in interest rates and endured a sharp selloff, sending indices to the worst levels since February. There is a saying in the financial markets, "Sell in May and go Away", where investors sell stocks during May to avoid the Summer months and repurchase stocks in the Fall. Maybe investors took this spike in rates and growing uncertainty as an effort to kick off this phenomenon a few weeks early. We shall see.

The Cure for Higher Rates

When interest rates spike like they have over the past week, at some point the higher yields attract investors thereby eliminating the increase in rates. We saw some of this as the 10-year Note hit 4.70% on Tuesday before falling to 4.57% by Thursday.

On Wednesday, in another sign that higher rates attract the buyers, the Treasury Department sold billions of dollars in 20-year bonds, and the buying demand was strong.

Oil Declining

We all know high oil prices are inflationary, and bonds hate inflation. Oil which recently hit $90 a barrel, declined down to $82 on Thursday. Lower oil prices were welcomed by the bond market and was another reason for some of the rate relief from 2024 highs.

Housing Impact

Housing Starts and Building Permits for the month of March came in well below expectations. With a market in need of housing inventory, this was an unwelcome weak signal as we enter the Spring housing market. With rates higher still in April, we may see home builders also express their "lack of confidence" that rates will come down.

Bottom line: With inflation fears elevated and the Fed backing away from a June rate cut, it is tough to see where the relief in interest rates would come from in the near-term. We will need to listen carefully to incoming data on signs that the inflation rate is cooling.

The bond market and interest rates had a rough week, especially on Wednesday when a high inflation print sent interest rates to the highest levels of the year. Let's discuss what happened and look at the fallout ahead.

Consumer Prices Climbing

On Wednesday, the Consumer Price Index (CPI) was reported, and all measures came in higher than expectations. This means that the headline number which includes food and energy was higher, the core reading which is inflation without food and energy was higher and the month-over-month readings and the year-over-year readings were higher. How high? The headline number came in at 3.5% year over, which is up from 3.2% from February. CPI bottomed last June at 3.00%.

This is a very important story to follow as inflation is a main driver of long-term interest rates. So, this higher-than-expected reading was very unwelcome and unnerved the markets to start the day.

Adding to the uncertainty and volatility, was recent speculation that the disinflation process or slowing rate of inflation was well at hand. The CPI reading coupled with last month's higher numbers has removed that comfort. With oil prices also at 2024 highs, we have rising fears that inflation will go higher still, which would likely mean higher rates.

Bye-Bye June Rate Cut

The renewed inflation fears have the markets pricing in no chance of a Fed rate cut in June. Right now, the markets are seeing the strongest possibility of a cut in November. This is a major change from when we started the year, as the financial markets were thinking the Fed would cut rates six or seven times, and the Fed said three. Now we could very well not see a rate cut in 2024.

The Fallout

On Wednesday, just hours after the CPI reading, the Treasury Department had to sell $39B worth of 10-year Notes. How would this auction go after a high inflation reading, fears of more inflation, and continued deficit spending? Well, the auction was awful. The Treasury had to issue higher interest rates to attract investors, due to tepid demand. This added to the pressure on rates and pushed the 10-year Note and thus mortgage rates to the highest levels of 2024.

The Fed Minutes

Two weeks after every Fed meeting, the Fed releases their Minutes, which are bullets of what was discussed among members. These are released to give financial markets a peek at what they are saying behind the scenes. Note, these Minutes are carefully packaged to help guide markets. We will not see the full Minutes from these meetings for five years.

The Minutes were about as bad for the mortgage industry as they could possibly be.

Half of the bullets released talked about fear of inflation, persistent inflation, and uncertainty that it will come down. This was not part of the Fed meeting two weeks ago where the Fed Chair Powell led the markets to believe that three cuts were still coming and that inflation was trending in the right direction.

They also said that they want to start slowing the balance sheet reduction, but only in Treasuries and not mortgage-backed securities. This was also unwelcome as the spread between mortgage securities and Treasuries is historically wide and could narrow considerably if mortgage-backed security balance sheet reduction was slowed.

4.50%

This is an important level to watch in the 10-yr Note. For mortgage rates to find their footing and see improvement from this past week, we need to see the 10-yr Note move back beneath 4.50%.

Bottom line:This past Wednesday, changed the landscape for interest rates as we head into the home buying season. With inflation fears elevated, the Fed backing away from a June rate cut, and Treasury auctions not performing well. It is tough to see where the relief in interest rates would come from in the near term. We will need to listen carefully to incoming data on signs that the inflation rate is cooling.

This past week interest rates moved higher with the 10-year Note yield briefly touching the highest levels of the year. Let's discuss what has happened the past couple of weeks and look ahead.

The Fed and Rate Cuts

A little more than two weeks ago, Federal Reserve Chair Powell, led the world to believe the Fed will be cutting rates three times in 2024. The Fed's dot plot, which is a rate forecast of the Fed members themselves, also confirmed three cuts before year-end.

Now, just days later, and thanks to a hotter-than-expected inflation report, and various Fed speakers, the idea of three cuts, or even one cut is very much at risk.

Two Fridays ago, the Fed's favorite gauge of inflation, the Core PCE, was released. The number came in at 2.8% year-over-year, which matched expectations. What's the problem? One - It did not come down from the previous month and remains sticky. Two - The previous month's reading was revised higher to 0.5% for the month! The 0.5% annualized means inflation would be 6%; THREE times the Fed's target of 2.00%. This completely spooked the bond market and has since put Fed members on their heels in response.

For instance, Atlanta Fed President Raphael Bostic shared that he only sees one rate cut in 2024 and that it would be coming in the fourth quarter. Other Fed members have shared similar sentiments. Where were these predictions just two weeks ago when the Fed issued its dot plot?

After the spike in rates this week, Fed Chair Powell attempted to soothe the markets by suggesting three cuts could still happen this year.

It's this lack of consensus, uncertainty, and land of confusion that is helping keep interest rates elevated.

Rate Cuts Abroad

While the U.S. tries to figure out when to cut rates, many other parts of the globe have begun or are beginning to cut rates. The latest this week was the EU, which shared that inflation has moved unexpectedly lower and June might be the right time to cut interest rates. The good news here? As economies around the globe struggle and their interest rates are lowered, that puts downward pressure on our interest rates. So, while this past week has been very unnerving about rates going significantly higher, there are many factors to consider besides inflation and the Fed.

Bottom line: We joke about the land of confusion, but that has essentially been the mortgage and housing world for over 2 1/2 years. Questions on "Where is inflation going?" "How is the economy doing?" and "What is the Fed going to do?" remain unanswered. We do know the old saying "The cure for higher rates is higher rates"; meaning as rates edge higher, it attracts investors who buy bonds… which stabilizes rates. Finally, the next move from the Fed will be a cut and it will probably come sooner rather than later. Better days ahead.

Mortgage rates improved slightly in this holiday-shortened week. Let's discuss what happened as the first quarter of 2024 comes to an end and we brace for a surprise on Monday, April Fool's Day.

Fed Members Not Aligned

At the most recent Fed Meeting, Fed Chair Jerome Powell led the markets to believe there will be three rate cuts in 2024. The Federal Reserve's dot plot, which is a forecast of interest rates amongst the members, also suggested three rate cuts.

Yet to start the week, Atlanta Fed President Rafael Bostic, said he only sees one rate cut in 2024. This lack of unity, amongst the Fed members, creates volatility and uncertainty, which we continue to see in the financial markets.

The Global Slowdown

Interest rates are like bad economic news here and abroad. Over the last couple of weeks, we have seen numerous warning signals from major countries as they either have entered a recession or are threatening to do so. At the same time, there have already been surprise rate cuts by other central banks around the globe, like Switzerland, to stave off a slowing economy. This is important because if rates around the globe move lower in anticipation of a local recession, it puts downward pressure on our interest rates here at home.

Big Friday News, Markets Closed

On Friday, the financial markets are closed in observance of Good Friday. Yet, there are a couple of huge headline risk events taking place. First, the Fed's favored gauge of inflation, the Core Personal Consumption Expenditure index (PCE) will be reported. The Fed wants to see this number move sustainably towards 2%. Expectations are for it to come in at 2.8% year-over-year. If the number is reported hotter bonds may not like it, the opposite is true.

At lunchtime on Friday, Fed Chair Powell will speak and offer thoughts on the economy. You never know what can be said, and how it might move the market.

With financial markets closed on Friday, we will need to wait until Fool's Day Monday, April 1st to see the reaction. Let's hope the markets don't make a fool of us.

Key Levels

Both the Treasury and the mortgage-backed security market are trading right at key levels, placing no large bets in advance of Friday's headline risk. This coming week may determine whether interest rates improve further or get turned away higher.

Springtime Is Here

We are seeing housing inventory perk up across the country for the Spring home-buying season. Many people are finding opportunities with rates stabilizing off the highs of last Fall. Pent-up demand is being released as people finally say life goes on.

Bottom line: The Spring home-buying season may pose a terrific opportunity for those looking to make a move. Interest rates are not expected to decline sharply in the absence of a surprise recession signal. So, it may be wise to take advantage while others may sit on the sidelines.